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The delayed October employment report and the first read of third-quarter gross domestic product will probably show the U.S. labor market slowed again last month and the economy lost steam -- even before the partial government shutdown.

The advance estimate for third-quarter GDP will be released Thursday at 8:30 a.m. Eastern time. Economists polled by Thomson Reuters expect the U.S. economy to have expanded by 2 percent during the April-June period, slower than the 2.5 percent annualized rate recorded in the second quarter.

On Friday, the Labor Department will release the October jobs report, which was originally scheduled for Nov. 1. This report will be distorted in several different ways by the 16-day government shutdown that began Oct. 1.

First, the establishment and household surveys have different ways of classifying workers. In the establishment report, employees are counted as on payroll if they receive pay during the survey week which, as usual, was the week containing the 12th of the month.

While the nonessential federal employees were not at work during that week, they received back pay to cover the shutdown, so they will show up in the payroll survey. "This means there won't even be a sharp fall in federal government payrolls," Paul Dales, senior U.S. economist at Capital Economics, wrote in a note to clients.

That said, state and local government payrolls may decline after some hefty gains in the previous two months, Dales added. But this would be due to the failure of the seasonal adjustment process to capture in full the start of the academic year rather than the shutdown.

Employers probably added 125,000 workers to their payrolls in October, according to the average estimate of 70 economists polled by Thomson Reuters. That's lower than the already disappointing result of 148,000 job gains in September.

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The unemployment rate is a different story, however. The shutdown will probably push the unemployment rate higher to 7.3 percent, from 7.2 percent in September. The unemployment rate is derived from a separate Labor Department survey of households rather than the payrolls tally.

While the household survey will count furloughed federal workers as employed, the household survey will record them as unemployed, according to the Labor Department's fact sheet on how the shutdown will affect the October employment report. The same happened during the late 1995 and early 1996 shutdown. On that occasion, payroll employment continued to rise while household employment fell.

At the start of the recent shutdown, roughly 800,000 federal government employees were told to stay at home. But by the time of the reference week for the household survey, 350,000 civilian defense employees had been recalled to work. That suggests a maximum of 450,000 government workers will have been classed as unemployed.

That said, now that the shutdown is over and federal employees are back at work, "any fall in the household measure of employment and any rise in the unemployment rate will be reversed in November," Dales said.

Second, these data challenges also complicate other aspects of the report. The Labor Department has noted that federal employees who worked fewer than 35 hours during the survey week may be counted as part-time for economic reasons, even though their positions remain full-time.

Additionally, Ethan Harris, co-head of global economics research at Bank of America (BAC), looks for average hourly earnings to grow 0.2 percent in October, faster than the 0.1 percent increase in September but in line with the average over the past six months.

Some may point to the delay in data collection and question the reliability of the October jobs report. Dales is firmly in the opposite camp. "It is possible ... that this October's payrolls data may be more reliable than usual," Dales said.

The Labor Department addressed the issue of accuracy after the 1995-96 shutdowns and it concluded the data were no less reliable than usual. In fact, the delay of the December 1995 report by two weeks meant that the BLS received more responses to the payroll survey than usual, "enhancing the reliability of the preliminary estimates."

Federal Reserve

Market sentiment around the Federal Reserve has swung dramatically in the past six months -- in the spring it was "QE infinity," by the fall it was "tapering regardless of the data" and more recently some seem to again see QE infinity, Harris said.

With growth stuck in the low 2 percent range and inflation trending well below the Federal Reserve's 2 percent target, the central bank hit the snooze bar again at its October policy meeting and pressed on with $85 billion in monthly bond purchases, saying it plans to "await more evidence that progress will be sustained before adjusting the pace of its purchases."

Goldman Sachs economist Jan Hatzius currently expects the Fed to start tapering quantitative easing, or QE, at its March 2014 Federal Open Market Committee meeting, when "the economy would probably be growing at a more robust 3 percent pace and the distortions to the economic data have washed out."

If March is the correct start date for the tapering, Hatzius expects the QE program to end sometime in the fourth quarter of 2014.

The Fed has held interest rates at rock-bottom levels since late 2008 and has quadrupled the size of its balance sheet to more than $3.7 trillion through three rounds of QE.

"However, the March tapering forecast is conditional on the assumption that the next round of fiscal deadlines will prove less disruptive than the most recent set [of data]," Hatzius said. "If there is another lengthy debt ceiling fight that lasts until close to the March FOMC meeting, the tapering decision would likely be delayed even longer."

So you're seeing a lot of strength in housing, and it's coming from almost every place geographically ... So that's sort of the big winner. Auto and that whole complex is a big winner. They're doing over 15 million cars this year, up from 8.5 at the bottom. And then you have the energy complex, which is really, really a revolution. This is hard to underestimate the impact of energy and all the natural gas that's being produced and all the subsidiary types of things that come from that activity. And if you add on top of that, technology which is still a very big pocket of strength and quite robust in the United States, you've got some really good stuff happening.

On the other hand we do have the U.S. government at work, trying to decrease growth as rapidly as they can. And so they've, unfortunately, had some success in that area, and that leaves us somewhere in the 2%-plus area.

On the positive side, economic fundamentals in the United States continue to improve. The main impediment to growth appears to be the speed and nature of the withdrawal of fiscal stimulus. Debate has actually now opened up on how and when to withdraw some of the monetary expansion. All of this is very good news.

At the same time, the rest of the world looks no stronger. Europe is mired in a recession, Asian growth seems more modest and Japanese attempts to restimulate their economy through monetary stimulation have set off further downward pressure on interest rates and currency values.

The overriding driver of recovery in the housing market remains the underproduction of both single and multifamily product throughout the economic downturn and up to and including this year. Over the past 5 years of housing production, we've built an average of under 700,000 single and multifamily homes total per year, with an average obsolescence rate of approximately 300,000 per year. This compares to a need for new dwelling units per year of between 1.2 million and 1.5 million.

This year, a significantly stronger year of building activity, we will produce approximately 950,000 single and multifamily dwellings, and again, will underserve the country's needs. We have more than absorbed the overbuilding of the early to mid-2000s, and have been underproducing for a protracted period of time. This shortfall will have to be made up, and the builders of both multi and single-family products have been pushing to increase production.

I think when you look at some of the economic indicators, housing starts are up, prices are up on housing. I think housing is a really important measure for us because we have a lot of jobs around that. A lot of contracting roofers, et cetera, around that. All of that is positive. And so we're feeling like we're coming off the end of the year with some momentum, and that will certainly help us.

I think there's reason to be very optimistic when you consider that demographic tailwind that will continue over the next 5 to 10 years, certainly. And then when you think about just the economy itself and you look at the strength of the balance sheets of consumers and corporations, the amount of liquidity out there, combined with the depth of the housing correction, I think there's a good argument we made that the housing cycle we're in right now will be strongest of the last 3 that we've seen.

Although we have seen recent improvements in the U.S. economy, growth is relatively light and confidence remains fragile. In addition, while the market generally feels better about the tail risk in Europe, the economy is challenged.

Given the continued uncertainty in the market, we are not managing the firm with the hope that the macro backdrop will improve. We are focused on managing through a continued difficult operating environment.

We continue to be very concerned about the prospects for the financial markets and the economies of North America and Western Europe, accentuated by potential weakness in China. There continues to be a big disconnect between the financial markets and the underlying economic fundamentals.

Markets are firming. If the economy continues to expand like it is, I think you'll see the banks loosen up. And if sort of rates go up a little bit but underwriting loosens up a bit, I think you'll see similar demand, if not more. That's why we're not troubled by a little uptick in interest rates right now.

The situation in Europe is not even slightly better. It's probably slightly worse. Even if we do not have a Greece event, if you will, the environment is moving from an economic standpoint to recession. And so the mood with our clients over there is still to be thoughtful and to be very mindful about the way they invest. And when clients are thoughtful and mindful, they tend to wait a little bit more and to think further on when and how much they're going to invest.

"I think the whole thing about the 2% extra payroll tax wasn't helpful. Don't forget, in America, the average household makes $50,000. 2% is $1,000 a year. I mean, after tax, that's a hurt in their pocketbook. Gas prices have been going up. I -- and you've seen the retailer results, the Walmarts, Kmarts, Targets, Costcos of the world had, had results less than they expected, not very good. So it's weak. I don't think it's -- I'm not ready to declare it's a permanent decline or a second dip on the recession there, but it's a little nervous as far as what's going on up there."

We're really proud now that the [government budget] deficit could only be $600 billion in the year, and while that's encouraging, it doesn't do anything to fix the long-term problem, and the long-term problem is entitlements. If you take a look at the Medicare and Medicaid in particular and some on Social Security that while debt as a percent of GDP is we'll say around 75% today and under the new estimate grows to 83% by the end of the decade ... You take those same numbers, go up to the next decade and it goes to 135% debt as a percentage of GDP largely driven by the baby boomer generation retiring which no politician, Republican or Democrat, really wants to talk about. They're more than willing to say we got to reform entitlements but as soon as you say well, like what, that's when they all start to back off because they don't want to anger the voters.

I think there's a lot of concern about central banks not just in the U.S., China elsewhere, and maybe they stretched themselves out, and they played this maybe game, you want to call it for quite a while and maybe they are getting a brick wall, and the days of easy and free money may be coming to an end or at least maybe tapering off. But it probably wouldn't be good [for the global economy in the short-term], maybe good for long-term because then it would be more based upon fundamentals rather than speed injections.